Despite the rise of China, US patents remain the global currency of innovation
04Jan13

In December, the World Intellectual Property Organization (WIPO) released global patent filing statistics for 2011 as part of its annual World Intellectual Property Indicators report. This data revealed that China’s State Intellectual Property Office (SIPO) had overtaken the United States Patent & Trademark Office (USPTO) to become the largest patent examining authority in the world according to the number of applications it receives. While WIPO suggested that “the geography of innovation has shifted”, the growth in SIPO’s workload cannot tell us anything for sure about the quality of the applications it handles or the strategic business value of the patents it grants – or, for that matter, about the innovation in the inventions those patents protect. Nevertheless, the growth of patenting activity in China should not be ignored by IP owners.

In 2011, SIPO received 526,412 applications for invention patents, surpassing the USPTO which received 503,582. The Japan Patent Office (JPO) was in third place, handling 342,610 applications. China already led the world in terms of the other classes of IP right, receiving almost a quarter of all the trademark applications in the world during 2011. “Sustained growth in IP filings indicates that companies continue to innovate despite weak economic conditions,” said WIPO director general Francis Gurry. In the foreword to the WIPO report, he suggested that “even though caution is required in directly comparing IP filing figures across countries, these trends nevertheless reflect how the geography of innovation has shifted”.

The report shows that the rapid growth in patent applications in China is largely accounted for by domestic filings, which rocketed by 41.9% between 2010 and 2011. In 2010 the Chinese government published its National Patent Development Strategy, a 10-year economic plan to turn the country into one “with a comparatively high level in terms of the creation, utilization, protection and administration of patents” and to “effectively support the effort to make China an innovative country”. But even before the strategy was released, there were powerful incentives in place to encourage Chinese companies to apply for patents domestically – and this could well go some way to explaining the surge in filings.

However, it is important to remember that patent filings are not a definitive indicator of innovation. Rather, patents are a currency by which innovation can be protected, traded, exchanged, sold, licensed and shared. As Gerard J Tellis of USC Marshall School of Business points out in Forbes, innovation itself is dependent on a whole host of factors, including: the amount of money invested in research and development; the successful conversion of that R&D spend into useful products or services; whether the fruits of R&D are disruptive or sustain existing markets; and whether prevailing social conditions encourage or restrict an environment of innovation. Higher filing rates do not tell us that much about any of these things, and neither do higher grant rates – which, among other things, could just be indicative of lower quality standards at the issuing office (though it is important to note that between 2010 and 2011, SIPO had a lower grant rate than the USPTO, the JPO and the Korean Intellectual Property Office, according to data from IP5).

To maximise the potential return on their investment in patenting, Chinese companies must look beyond their own back yard. China’s national patent plan takes this into account, aiming to double the number of patent applications filed by Chinese entities in foreign jurisdictions. Another stated objective is for Chinese entities to acquire “a large number of core patents… in some key fields of emerging industries and in key technological fields of traditional industries”. US patents are still the most valuable in the world in terms of the value creation possibilities they provide, and the creators of the national patent strategy no doubt realise that. But, on the whole, Chinese companies still lag behind others in the US patent stakes. The Institute of Electronic and Electrical Engineers’ (IEEE) 2012 Patent Power Scorecard, which ranks companies in different industries by the size and quality of their US patent portfolios, only includes two Chinese companies: Huawei and Lenovo. Meanwhile, a study from UBM TechInsights released towards the end of last year showed that, despite a gradual increase in US applications and a slowing in domestic filings, China’s leading semiconductor companies still file about 90% of their patent applications in their home country. That said, Chinese telecoms companies ZTE and Huawei were two of the top three filers in 2011 for Patent Cooperation Treaty applications – suggesting that at least some in China are taking the initiative when it comes to obtaining multi-jurisdictional patent coverage.

That is not to say, of course, that Chinese patents will not themselves come to be seen as highly valuable strategic assets in the future. Currently, they cannot afford their owners anywhere near the leverage that US patents can, as the same potential for extracting significant damages from an infringer just isn’t there; but that could well change, considering that the Chinese IP system is still in its infancy relative to its US counterpart. Beyond the patent system itself, China is well on its way to becoming the world’s key consumer market – and ultimately, it is consumers that determine which patents are valuable and which are not. The US dollar remains the world’s main reserve currency and, in a similar way, the US patent is the global currency of choice when it comes to monetising innovation. But wherever in the world they come from, companies would be unwise to underestimate the growing prominence of the Chinese patent.